Note 7: Income Taxes

Income before income taxes includes income from foreign operations of $4,157,000, $6,007,000 and $3,423,000 for fiscal 2014, 2013 and 2012, respectively.

Total income tax expense for the fiscal years ended January 2, 2015, January 3, 2014 and December 28, 2012 consisted of the following:

			Fiscal Years
(In thousands)	2014		2013		2012

Current
Federal	$	26,647	$	22,468	$	23,562
Foreign		896		1,411		852
State		5,798		4,824		4,304
		33,341		28,703		28,718
Deferred
Federal		(5,059)		(2,703)		(3,378)
State		(1,018)		(695)		(816)
		(6,077)		(3,398)		(4,194)
Total	$	27,264	$	25,305	$	24,524

The Company’s effective tax rate differs from the statutory federal tax rate of 35% as shown in the following schedule:

				Fiscal Years
(In thousands)	2014			2013			2012

Tax at federal statutory rate	$	23,788		$	22,381		$	21,612
State taxes, net of federal benefit		3,226			2,819			2,409
Tax exempt interest income		(44)			(36)			(104)
Non-deductible expenses		289			226			296
Non-deductible stock-based compensation		-			(79)			(40)
Other		5			(6)			351
Tax expense	$	27,264		$	25,305		$	24,524

Effective tax rate		40.1	%		39.6	%		39.7	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at January 2, 2015 and January 3, 2014 are presented in the following schedule:

	Fiscal Years
(In thousands)	2014		2013

Deferred tax assets:
Accrued liabilities and allowances	$	17,244	$	15,539
Deferred compensation		26,873		22,373
Other		28		-
Total deferred tax assets		44,145		37,912

Deferred tax liabilities:
State taxes		(1,717)		(1,519)
Deductible goodwill		(2,978)		(2,925)
Property, equipment and leasehold improvements		(459)		(622)
Unrealized gain of deferred compensation plan assets		(3,377)		(3,215)
Other		-		(394)
Total deferred tax liabilities		(8,531)		(8,675)
Net deferred tax assets	$	35,614	$	29,237

Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.

The Company is entitled to a deduction for federal and state tax purposes with respect to employees’ stock award activity. The net deduction in taxes otherwise payable arising from that deduction has been credited to additional paid-in capital. For the fiscal years ended January 2, 2015, January 3, 2014 and December 28, 2012, the net deduction in tax payable arising from employees’ stock award activity was $5,100,000, $4,267,000 and $3,948,000, respectively.

The Company and its subsidiaries file income tax returns in the United States federal jurisdiction, California and various other state and foreign jurisdictions. The Company is no longer subject to United States federal income tax examination for years prior to 2011. The Company is no longer subject to California franchise tax examinations for years prior to 2010. With few exceptions, the Company is no longer subject to state and local or non-United States income tax examination by tax authorities for years prior to 2010.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Balance at December 28, 2012	$	908,000
Additions based on tax positions related to the current year		316,000
Additions for tax positions of prior years		-
Reductions due to lapse of statute of limitations		(77,000)
Reductions due to change in accounting method		-
Settlements		-

Balance at January 3, 2014	$	1,147,000
Additions based on tax positions related to the current year		486,000
Additions for tax positions of prior years		-
Reductions due to lapse of statute of limitations		(87,000)
Reductions due to change in accounting method		-
Settlements		-

Balance at January 2, 2015	$	1,546,000

Unrecognized tax benefits are included in other liabilities in the accompanying balance sheet. To the extent these unrecognized tax benefits are ultimately recognized, they will impact the effective tax rate in a future period. There are no uncertain tax positions whose resolution in the next 12 months is expected to materially affect operating results.

Deferred income taxes have not been provided on the undistributed earnings of foreign subsidiaries. The amount of such earnings at January 2, 2015 was $3,920,000. These earnings have been permanently reinvested and the Company does not plan to initiate any action that would precipitate the payment of income taxes thereon. The unrecognized deferred tax liability for these earnings is estimated to be approximately $313,000.